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ACT172
QUIZ on Cost of Common Equity and Weighted Average Cost of Capital

Determine
Name: the correct statement/s among the choices. CIRCLE the letterls ofyour choice. There may be more lhan one correct statement.
2. The peso amount of flotation costs is added from the price of the stocks to get its cost of cupital

T h e weights used in WACC are the percentagcs ofthe different types of capital the linn plans to use when it raises capital in the future.

No cost should be assigned to retained earmings because the fim does not have to pay anything to raise them. They are gencrated as cash flows
by operating assets that were raised in the past, hence, they are "free."

All other things held constant if the corporate tax rate increases, then the weighted average cost of capital will decline.

n situationswherereliable inpus for the CAPM approach are not available, as would be true for a closely held company, analyss ofun use the
bond-yield-plus-risk-premium approach
Write your FINAL ANSWER ON THE BLANK provided. Write your FINAL SOLUTIONS ON THE QUESTIONNAIRE and provide the
FORMULA you used, except for soving WACC.

For numbers 1-3, use the following information. KITKAT CO.'s balance sheet shows that the company has 10,000,000 shares of stock, and the stock
has a book value per share of PS.00. The current stock price is P7.30 per share, and stockholders' required rate of return is 12.25%. The balance sheet
of KITKAT CO. also shows a total of P25,000,000 long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%. The debt
has a total current market value of P27,000,000. The management of KITKAT CO. recently decided that its target capital structure should have 35%
debt, with the balance being common equity. The tax rate is 25%.

10.17. 1. Calculate WACC based on book market (2 points)

WACd (raC1-T) * wp E )
i0 5u7 2. Calculate WACC based on market value (2
points) +We ( D, +9
10.O0 7. 3 . Calculate WACC based on target capital structure (2 points)
337. 4. TWIX INC.'s common stock currently sells for P45.00 per share. The TWIX INC is expected to pay dividend of P19.30 next
year and ts expected growth rate is 9.03%. New common stock can be sold to the public at the current price, but a flotation cost of 3% would be
incurred. By how much would the cost of new common stock exceed the cost of retained earnings? (3 points)
D e 53 2s
e
Po 5 15192/
P.C-F) Dftrona 1 ,
9-30
9.30 +0.0903
+0-0903 = 53. 2s 7 51.927.
4s(1- 03) 4S

i0.55/ 5. The management of SNICKERS CO asked you, the Senior Accountant of the company, to help them in estimating the cost of
common equity using the Bond Yield Plus Risk Premium Approach. The yield on the fim's bonds is 7.50%. The company's economists forecasted
that its cost of equity should require a risk premium of 3.05% over the company's own cost of debt. The tax rate is 30%. What is your estimate of the
SNICKERS CO's component cost of equity would be? (2 points)

e Bond yield + Risk Prenium

07s +.030S

0 $S7
6. To help finance a major expansion, M&M CORP's Chief Financial Officer detemined that the corporation should estimate its
cost of equity. The risk-free rate is 3 percent, he beta is .90, and the risk premium is 5 percent. How much is the component cost of equity to be
used in WACC? (2 ponis) : YgF or fe R *marke ist premium)
RE + isk prmium RF nisk prmium
37. 5/
12-3s7 1._7. Determine
De $:
the cost of capital with a market return of 1 1% and risk-free rate of 6% when the beta is 1.25 (2 points)

04
C0s12s)
12:3S7.
 WACC Weigh
/sA
0. 02
.0u1 t /.12 2 f PV L TD 3sm
0 17 7. 0.0%l
CE
0Mx5 50 mn
*
fa(1-T)- 7 ( -as)
7 (75)

WA CC2. . ou)+ 73/.(1ns) f MV LTD 2tm 21

0142 0844as CE
jOm 7.9. 14 m
lo.SU7.

WACC 9s. (.0o) as7121e) larget Cpil Shuchrt (iven

0 . 021 + 0.09942S LTD
10 06 7Z C us